Leverage and corporate performance: evidence from unsuccessful takeovers

Article Abstract:

This paper finds that, on average, targets that terminate takeover offers significantly increase their leverage ratios. Targets that increase their leverage ratios the most reduce capital expenditures, sell assets, reduce employment, increase focus, and realize cash flows and share prices that outperform their benchmarks in the five years following the failed takeover. Our evidence suggests that leverage-increasing targets act in the interests of shareholders when they terminate takeover offers and that higher leverage helps firms remain independent not because it entrenches managers, but because it commits managers to making the improvements that would be made by potential raiders. (Reprinted by permission of the publisher.)

Research, Acquisitions and mergers, Debt financing (Corporations), Debt financing, Leverage (Finance), Leverage

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The determinants of capital structure choice

Article Abstract:

This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, it examines a much broader set of capital structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regard to different types of debt instruments, the authors analyze measures of short-term, long-term, and convertible debt rather that an aggregate measure of total debt. Third, the study uses a factor-analytic technique that mitigates the measurement problems encountered when working with proxy variables. (Reprinted by permission of the publisher.)

Methods, Debt, Factor analysis, Discriminant analysis, Financial research

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Interest rate swaps and corporate financing choices

Article Abstract:

This paper describes the firm's decision to borrow short-term versus long-term and shows how the introduction of interest rate swaps affects this choice. The model shows that in the absence of a swap market, interest rate uncertainty can lead firms to substitute long-term for short-term financing. However, when swaps exist, there is a tendency for firms that expect their credit quality to improve to borrow short-term and use swaps to hedge interest rate risk. The model suggests that, while the demand for fixed for floating swaps is enhanced, the demand for floating for fixed swaps is reduced by the presence of asymmetric information. (Reprinted by permission of the publisher.)

Corporations, Corporate finance, Interest rate swaps

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